This year's stock market slump raises several pertinent questions for long‑term investors. Chief among them is what to do with holdings that have dramatically fallen in value. After all, very few portfolios will have been able to wholly avoid falling share prices over recent months.
In Questor's view, investors must assess their holdings on a case‑by‑case basis to determine which stocks can realistically rebound in the next bull market. Stocks that do not make the cut should be sold and the capital reinvested in others with more obvious long‑term recovery potential. While this is undoubtedly a cold‑hearted approach, the economy has entered a new era that demands more extensive due diligence.
With that in mind, this column has reassessed the investment prospects of Kingspan following its 49pc share price slide so far this year. The Irish‑based company - whose shares are listed in London - makes insulated panels, boards, pipework and ducting that can help reduce energy use.
Its shares have fallen heavily because of deteriorating trading conditions, with order intake volume dropping sharply over the summer months. While underlying sales in the first nine months of the year rose by 20pc, and still grew by 9pc in a tough third quarter, this was well down on the record 31pc sales growth generated in the first quarter of the year.
Margins have also come under pressure as a result of rising raw material costs; trading margins fell by 0.8 of a percentage point to 10.5pc in the first half of the year. It would be unsurprising for them to fall further in the short run owing to the rampant nature of inflation. Clearly, the company's short‑term prospects are relatively uncertain. A likely slowdown in the construction industry and ongoing cladding‑related issues could act as a drag on its near‑term prospects.
However, Kingspan's financial standing suggests it is in a strong position to deliver long‑term growth.
Debt levels amount to just 54pc of net assets, while net interest cover of 23 in the first half of the year shows the business could cope with rising finance costs and falling profits if necessary. In fact, the company's financial standing means it could emerge from the current downturn in a stronger position relative to weaker rivals.
It also has the capacity to engage in further M&A activity following planned acquisition spending of €1bn (£834m) in the current year, while improving its competitive advantage via additional investment in new product areas. Over the long run, demand for its products is likely to rise significantly. Energy efficiency is a central part of the world's push to achieve net zero.
Kingspan's shares have fallen by 16pc since we first tipped them in August 2020. While a price‑to‑earnings ratio of 17.8 is far higher than the multiple of many other medium‑sized and large companies, its solid finances and long‑term growth potential mean we remain upbeat about its prospects to recover, and to make additional gains for readers, over the coming years. Hold.
Questor says: hold
Share price at close: €54.02
The stock market's fall since the start of the year means that numerous companies now trade at bargain‑basement valuations. Many investors may therefore be attracted by low share prices that appear to offer scope for significant long‑term gains.
However, they can just as easily prove to be value traps that produce disappointing returns.
FTSE 100 pharmaceutical company Hikma's forecast price‑to‑earnings ratio of 10 is tempting given the encouraging performance of its injectables and branded segments. However, challenges in its generics division caused by intense competition in America are likely to hold back its near‑term financial performance.
The company has also been without a permanent chief executive for around five months after the previous incumbent left the company in June.
On balance, at a time when excellent buying opportunities across the FTSE 350 are not hard to find, this column will maintain just a hold rating on Hikma, as it did in February 2019. Since then the shares have fallen by around 12pc and lagged the FTSE 100 by 17 percentage points. Hold.
Questor says: hold
Share price at close: £14.96
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